Sunday, June 27, 2010
NEW YORK -- The financial overhaul is about more than exotic derivatives and complex risk assessments. It will change how you interact with the financial system every day, from swiping your debit card at the store to applying for a mortgage.
That includes new rules governing how we bank, borrow and invest, plus the creation of a new regulator to make sure financial transactions like signing up for a credit card are safer and easier to understand.
The legislation does not go as far as some would have liked. Auto dealers, who make most car loans, won't face oversight by the new consumer bureau. Nor will banks with less than $10 billion in assets, even though they serve most communities in this country.
Here's a piece-by-piece guide to the new rules.
A new Consumer Financial Protection Bureau, to be housed in the Federal Reserve but run independently, will have the power to write consumer-protection rules for banks and other financial institutions, like mortgage lenders.
It will also examine and enforce regulations already in place at mortgage lenders and banks that hold more than $10 billion in assets.
The bureau will have the power to ban financial products that it considers unsafe. It could also outlaw anything that might be confusing to consumers, like the fine print on credit cards or mortgages.
In theory, it could also block credit-card companies from charging especially high interest rates. The idea is to bring consumer regulation under one roof, rather than spreading it out among seven different agencies.
"It's hard to be an expert on economics and consumer protection at the same time," says Jeffrey Sovern, a law professor at St. John's University and an expert on consumer law.
Still, the new bureau will cover only half the bank branches in the nation because of the $10 billion asset requirement, according to data from the National Community Reinvestment Coalition, a Washington-based consumer group.
It also may not be as independent as it seems. If federal banking regulators object to new consumer-protection rules, they can appeal to a newly created council made up in part of their fellow banking regulators.
Credit and debit cards
Say you walk into a gas station and pick up some soda, candy and gum. The total is $11, but there's a sign at the register saying you can only pay by credit card if the purchase is $20 or more.
Under the new legislation, the minimum can be no more than $10, and only the Federal Reserve can raise it.
The Federal Reserve will also have the power to limit the fees that card issuers can collect on debit-card transactions. But the rule applies only to big banks, not to credit-card issuers such as Visa and MasterCard.
Right now, banks usually charge stores 1 to 2 percent for each swipe - fees that added up to nearly $20 billion last year. Stores and restaurants say lower fees would allow them to cut prices and to hire more people.
But even if prices fall at stores, banks might raise fees and rates for their customers. They could also scale back "reward" cards or free checking to make up for the money they're not collecting from stores and restaurants.
Right now, it can be maddeningly difficult to figure out your credit score. While you're entitled to one free credit report a year from each of the three credit-reporting agencies under federal law, you almost always have to pay to see your actual score.
Under the overhaul rules, any lender that turns down a borrower - whether it's for a mortgage, a department-store credit card or an auto loan - because of his or her credit score has to tell the borrower what that score is, and for free.
Remember all those risky mortgages that borrowers got without ever showing proof of income? The ones that blew up and set off the housing crisis? Under the new rules, lenders will have to verify a borrower's income, credit history and employment status.
On top of that, banks will have to hold on to at least 5 percent of the loans they make instead of selling them to investors. The idea is that they'll take fewer risks when they have skin in the game and aren't slicing, dicing and selling all their loans.
"They don't care about whether they make bad loans if the risk isn't theirs," says Dean Baker, co-director of the Center for Economic and Policy Research, a liberal Washington think tank. "Now they might have to."
Of course, if the banks are scaling back their risks, that means it could be harder for you to get a mortgage.
Regulators will have the authority to require all financial advisers to act in their clients' best interest. Practically speaking, this means disclosing fees, any disciplinary actions and potential conflicts of interest, such as commissions.
Until now, not all brokers who sell stocks, bonds, annuities and other investments have to make such disclosures. They could steer you into mutual funds or college-savings plans that pad their firms' profits or their own commissions, and you might never know.
The Securities and Exchange Commission will study the issue for six months to determine whether average investors are sufficiently protected by the rules already in place or whether something stronger is called for.
So the SEC could still decide not to act at all, meaning investors would still be stuck with a system in which their advisers can put their own financial interests, not the clients', first.
Financial reform to impact daily lives
The boom era for Arizona payday lenders, which offered quick, easy cash but charged extremely high interest rates, is coming to a close.
Starting Thursday, the state no longer will allow payday-loan operators to set interest rates as high as 460 percent annually. A 10-year-old law that allowed them to charge above the 36 percent annual rate cap imposed on other lenders, such as banks, will expire.
Voters and lawmakers have refused to extend the law, and those in the payday-loan industry have said they can't stay in business with the lower rate.
Some stores already have shut their doors, and an industry spokesman said more will follow. Payday lenders left in droves from other states that have imposed similar caps.
"What you are going to see is the smaller operators with one, two or three stores will close," said Lee Miller, a spokesman for Arizona Consumer Financial Services, a trade group that represents payday lenders. "The large companies are looking around and trying to find new products to meet the credit needs of Arizona consumers."
Miller said that to stay in business, many payday lenders likely will offer auto-title loans, which can generate annual returns of up to 204 percent, according to state law. The Center for Responsible Lending said more than 200 payday stores in Arizona have received auto-title loan licenses in the past two years, as it became more apparent payday licensing would end. Some payday lenders also will continue to offer check-cashing services.
But some large businesses are just throwing in the towel.
Check 'n Go, licensed under Southwestern & Pacific Specialty Finance Inc. in Cincinnati, stopped offering payday-loan services a month ago in Arizona and began closing 11 of its 34 stores on June 12. The company, which has 102 Arizona employees, plans to close all stores by the end of summer.
"For those (payday stores) who abide by the law, you can't make it on the 36 percent annual percentage rate," said John Rabenold, a Check 'n Go spokesman. "It's sad. It really is. There were a lot of good employees, and a lot of good consumers who need to use them but will not have the option from regulated brick-and-mortar stores."
Rabenold said a few remaining stores will remain open to collect outstanding loans after the law that created payday-loan licenses expires Wednesday. The licenses are what allowed lenders to exceed the 36 percent rate cap.
Arizona will become the 16th state to impose an interest-rate cap on payday loans, according to the Center for Responsible Lending in Durham, N.C., which tracks payday-loan operations across the country. At least six other states are looking at imposing restrictions.
Arizona Attorney General Terry Goddard has pledged to go after payday lenders who do not abide by the new interest-rate cap.
"They are terrible loans," said Susan Lupton, a senior policy associate for the Center for Responsible Lending, a non-profit research and policy organization. "They are absolutely awful. There has not been a new state that has authorized payday lending in years, and states are continually looking at ways to cut down shops or get rid of payday lenders altogether."
Payday lending began in Arizona in 2000, following intense lobbying by the industry. The Legislature created a "deferred presentment licensing program" that allowed payday lenders to charge huge interest rates. The licensing was to last 10 years, unless lawmakers made it permanent.
But as hundreds of stores began cropping up across the state, criticism of payday loans mounted. Opponents said payday loans trapped poor consumers in debt, leaving borrowers with less disposable income after making high interest payments.
With the licensing expiration date approaching, the industry in 2008 asked voters to approve a ballot measure that would have allowed payday lenders to stay in business with some new restrictions. Despite the industry spending more than $14 million on the measure, voters resoundingly decided to end payday licensing. Over the past two years, lawmakers also refused to extend the law.
Kelly Griffith, who fought the industry as co-director of the Center for Economic Integrity in Tucson, said it was a "huge accomplishment" to get payday loans out of Arizona.
Deborah Ward of Mesa agreed.
"I'm glad they will be gone," said Ward, who used a payday loan last year. "They overcharge in fees. I am so glad I'm not dealing with them again."
Griffith does not believe the industry will completely leave Arizona because the state has been a profit center for payday lenders.
In the past decade, the payday-loan business grew from a handful of stores to a high of 715 in 2006, before dropping to 522 branches this month, according to state licensing records.
Capping the interest rate deterred payday stores in other states.
When a 36 percent cap went into effect in Oregon in 2007, there were 329 payday licensees. Today, there are 67, according to Oregon's Department of Consumer and Business Services. In Ohio, the interest rate was capped at 28 percent in 2008, and the number of payday lenders dropped from 1,600 to 970, according to the Ohio Department of Commerce.
New loan strategies
The payday-loan business boomed in Arizona because many consumers had a need for immediate cash and loans up to $500 were easy to get. People with steady jobs and checking accounts could obtain payday loans by promising to repay them, plus pay a fee, after the next payday.
Miller said that with the economy struggling, there still will be a need for short-term loans, making it likely that auto-title loans will become popular.
"The Legislature has been very content with the auto-title program," Miller said. "It has existed as long as we have had payday loans."
Miller said consumers can use vehicles they own as collateral for loans, and the notes could run 30 days, a few months or years. The interest rate varies based on the length of the loan, with the highest rate being 204 percent annually or 17 percent a month for loans of $500 or less, according to state law.
Dave Shumway owns PDL Financial Services, a payday-loans business that served up to 200 customers a month. He stopped offering payday loans at the beginning of June and switched to offering auto-title loans.
But he said that may not help him stay in business because many borrowers who come to his store do not own their vehicles.
Jamie Fulmer, vice president of public affairs for South Carolina-based Advance America, which has about 50 payday-loan locations in Arizona, said his company is "evaluating all our options" and has not made a decision about auto-title loans.
Rabenold, the Check 'n Go spokesman, said consumers also could turn to online payday lenders, especially those based outside the U.S. that do not have to follow Arizona law.
"Consumers will still continue to get access to small-dollar loans from unlicensed, unregulated Internet lenders," Rabenold said.
Payday lenders calling it quits; some may offer auto-title loans
After several years of failed efforts to remake the property, Summit Apartments soon will become the property of Phoenix's Housing Department, which owns and manages low-income housing throughout the city.
The City Council was asked this week to allow the department to buy the property at Windrose Drive and Paradise Village Parkway West, across from Paradise Valley Mall.
Housing Director Kim Dorney said the property is owned by the U.S. Department of Housing and Urban Development, which assumed ownership when a previous owner, Community Services of Arizona, defaulted on HUD-guaranteed loans. A subsequent owner tried to persuade HUD to pay down debt on the 206-unit complex but failed.
HUD will sell the property to Phoenix for $1.
"At $1, I am extremely confident we can rehabilitate the property," Dorney said.
The department asked the council to set aside $4 million in Neighborhood Stabilization Program funds and other sources to buy and rehabilitate the property.
The department will manage the property.
The city owns approximately 3,500 units of public and other affordable housing and manages more than 5,200 housing-choice vouchers. These programs provide homes to over 25,000 Phoenix residents. The department provides services and referrals to residents, and financing to other organizations to create additional affordable housing.
Dorney said Summit Apartments should attract retail workers in the area who can make use of the nearby amenities - a transit center, park and schools.
Phoenix will buy 206-unit complex for low-income housing property
WASHINGTON - One year in the making, a sweeping overhaul of Wall Street rules forged in the aftermath of a financial crisis cleared congressional negotiations early Friday and headed to the House and Senate for final votes.
Lawmakers hope to have a bill on President Barack Obama's desk by July 4.
Success came at 5:39 a.m., hours after Obama administration officials helped broker a deal that cracked the last impediment to the bill, a proposal to force banks to spin off their lucrative derivatives-trading business.
The legislation, the most ambitious rewrite of financial regulations since the Great Depression, touches on an exhaustive range of financial transactions, from a debit-card swipe at a supermarket to the most complex securities deals cut in downtown Manhattan.
Eager to avoid a recurrence of the 2008 financial meltdown, lawmakers set up a warning system for financial risks, created a powerful consumer financial-protection bureau to police lending and force large failing firms to liquidate, and set new rules for financial instruments that have been largely unregulated.
"It took a crisis to bring us to the point where we could actually get this job done," said Sen. Chris Dodd, chairman of the Banking Committee.
In its breadth, the legislation would affect working-class homebuyers negotiating their first mortgage as well as international finance ministers negotiating international regulatory regimes.
The bill came together during a time of high unemployment for American workers, huge bonuses for bankers and rising antipathy toward bank bailouts.
"It is reassuring to know that when public opinion gets engaged, it will win," said Rep. Barney Frank, chairman of the House-Senate panel that merged House and Senate bills into one piece of legislation.
House negotiators voted a party line 20-11 in favor of the final agreement; senators voted 7-5, also along party lines.
Republicans complained the bill overreached and tackled financial issues that were not responsible for the financial crisis.
Frank and Dodd set a furious pace for lawmakers in their last day of talks, pushing them into the late hours to resolve the most nettlesome differences between the House and Senate.
Their goal, in part, was to equip Obama with a legislative agreement as he meets with leaders of the Group of 20 nations this weekend in Toronto.
"Congress has shown that America is ready to lead by example," Treasury Secretary Timothy Geithner said.
Shortly after 5 a.m., Rep. Paul Kanjorsky, D-Pa., moved to officially name the legislation the Dodd-Frank Bill. Dodd, who will retire at the end of this term, jokingly objected before lawmakers voted unanimously in favor. Aides and administration officials applauded.
Although the legislation addressed the causes of the last meltdown and more, it left for later any restructuring of the government-related mortgage giants Fannie Mae and Freddie Mac. Time and again, Republicans tried to shift the debate to the mortgage-purchasing firms, to no avail.
Overhauling those agencies "should have been our top priority" in writing the compromise bill, Rep. Spencer Bachus, R-Ala., top Republican on the House Financial Services Committee, said in a statement before the deal was completed. He said the bill focused on other areas, "many that are unrelated to the financial crisis."
The government took over Fannie and Freddie in 2008 after they suffered heavy loan losses in the housing crash. Their collapse has cost $145 billion, and the Obama administration has pledged to cover unlimited Fannie and Freddie losses through 2012, lifting an earlier cap of $400 billion.
Although many tough provisions in the bill survived, securing the votes of moderate Democrats in the House and a handful of Republicans in the Senate meant softening some provisions in the bill.
Under the bill, banks could lose billions in lucrative trading business, though negotiators blunted some of the harsher measures under consideration.
In a blow to Obama, the consumer-protection agency would not regulate auto dealers, even though they assemble loans for millions of car buyers. Payday lenders and check cashers would be regulated, but enforcement would be left to states or the Federal Trade Commission.
To pay for the costs of the bill, negotiators agreed to assess a fee on banks with assets of more than $50 billion and hedge funds of more than $10 billion in assets to raise $19 billion over 10 years.
The House-Senate panel numbered 43 total negotiators, though not all attended at all times.
The final agreement capped an all-night marathon session of public and private deal-making. House Speaker Nancy Pelosi stepped in to press agreement on one of the final obstacles.
As they worked toward the home stretch early Friday, negotiators softened a contentious Wall Street rule that would force large bank-holding companies to spin off their lucrative derivatives business.
The deal, negotiated between the White House and Sen. Blanche Lincoln, D-Ark., eliminated one of the last major sticking points. Congressional leaders were eager to wrap up the bill, with hopes of getting final House and Senate passage next week.
Derivatives are complex securities often used by corporations to hedge against market fluctuations. But they also have become speculative instruments for financial institutions, the most notorious of which were credit-default swaps that hedged against loan failures.
In the House, moderate Democrats and members of the New York congressional delegation fought to remove Lincoln's language.
Under the agreement, banks would spin off only their riskiest derivatives trades. Banks get to keep some of their lucrative business based on trades in derivatives related to interest rates, foreign changes, gold and silver. They could even arrange credit-default swaps, the notorious instruments blamed for the meltdown, as long as they were traded through clearinghouses. Banks also would be allowed to trade in derivatives with their own money to hedge against market fluctuations.
Congress set to OK financial overhaul
Thursday, June 24, 2010
Fannie Mae announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure.
Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.
"We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."
Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.
Here is the verbiage from the FN Bulletin:
Currently, the waiting period that must elapse after a borrower experiences a foreclosure is seven years. However, Fannie Mae allows a shorter time period – five years – if certain additional requirements are met (e.g., minimum down payment and credit score, and occupancy requirements).
These requirements are being modified to remove the five year option. Unless the foreclosure was the result of documented extenuating circumstances, which only requires a three-year waiting period (with additional requirements), all borrowers will now be required to meet a seven-year waiting period after a prior foreclosure to be eligible for a new mortgage loan eligible for sale to Fannie Mae"
Don't miss the section that says borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.
Fannie Mae Fights Back Against Strategic Defaulters
The Arizona Department of Housing got a green light from Washington, D.C., for a plan to use $125 million, its portion of federal funds allocated in February to help the nation's hardest-hit housing markets.
Arizona's program could slash mortgage balances for 1,850 households, three-fourths of them in Maricopa County.
The approach is far too small in scale to stabilize the state's housing market, officials said. But they hope it will spur further action from government and lenders on cutting mortgage principal to keep homeowners in their homes. The plan would go much further than existing government efforts in its attempt to make mortgages affordable.
The state will issue borrowers loans of up to $50,000 to apply to their mortgage balances. Their lenders will be expected to match or exceed that amount.
These "soft" loans would not likely have to be repaid, at least not in full, under the terms of the plan.
Homeowners would have to repay portions of the loans if the home appreciated or was sold during a 10-year period.
The program also would:
• Give lenders incentives of up to $5,000 to settle second mortgages for up to 1,500 homeowners.
Those loans have complicated many borrowers' attempts to modify their mortgage payments or complete short sales, in which they sell for less than what they owe but avoid foreclosure.
• Give up to $12,000 in temporary aid to as many as 1,000 households that have suffered reduced incomes.
The plan, dubbed "Save My Home AZ," is expected to launch in September.
As a trial run for potentially broader mortgage-relief programs, state officials said, it will blaze into largely uncharted loan-modification territory.
"What we're hoping is that, if it's successful, Treasury would provide more funding for it," said Carol Ditmore, the Housing Department's assistant deputy director of operations.
But with as many as 50,000 foreclosures expected to occur in Arizona this year, Save My Home AZ's direct impact would be minimal, officials said.
It also shares some of the drawbacks that have plagued other government-run housing-relief efforts. It imposes strict eligibility requirements, meaning many homeowners at risk of foreclosure won't qualify for help.
And its biggest hurdle is that it relies on the optional participation of lenders to match the cuts in principal.
Big mortgage lenders including Bank of America, which holds a significant portion of Arizona's troubled mortgages, have largely refused to reduce principal for borrowers seeking loan modifications.
MaryJane Rogers, spokeswoman for Chase Home Lending, a JPMorgan Chase & Co. subsidiary, said the company had not yet decided whether to participate in the Arizona program.
"We are committed to helping customers avoid foreclosure and are currently reviewing the details of the Arizona plan," Rogers said.
Ditmore said the Housing Department has engaged in several discussions with BofA, the country's largest mortgage lender, adding that bank officials have expressed their willingness to reduce loan principal for eligible participants.
BofA did not respond to phone and e-mail messages seeking comment Wednesday.
The program comes relatively late in the foreclosure crisis.
It is scheduled to conclude in June 2013, according to a proposal the state Housing Department submitted to Treasury officials earlier this year.
That's around the time many housing experts expect foreclosure activity to return to a historically normal level.
The $125.1 million in funding is part of $1.5 billion in Treasury Department funds.
Shared with California, Nevada, Florida and Michigan, the funding is known as the State Housing Finance Agencies "Hardest Hit Fund."
Treasury officials plan to distribute an additional $600 million to North Carolina, South Carolina, Ohio, Oregon and Rhode Island to help states with unemployment rates exceeding 12 percent.
Arizona mortgage relief plan to receive federal funding
Billionaire investor and Microsoft co-founder Paul G. Allen has spent roughly two decades and millions of dollars amassing real estate, primarily in Seattle.
But last year, Mr. Allen's Vulcan Inc. investment firm began intensifying its search for deals outside the Pacific Northwest, branching out into the beaten-down property markets of Southern California and Arizona.
Now that quest has yielded its first deal: Vulcan is paying $35 million in cash for an empty eight-story office building completed last year in downtown Tempe, Ariz. The transaction signals a two-pronged strategy change for Vulcan. The firm is both mixing more geographic diversity into its property portfolio and moving toward buying existing buildings rather than building from scratch, as the firm has typically done in the past.
"Historically, we haven't been a significant buyer of existing buildings," says Ada M. Healey, vice president of real estate at Vulcan, who heads up Vulcan's real-estate division and came to the firm in 2001 from ING Clarion Partners. Buying office buildings at some of today's lower prices makes more sense than new construction, because "there are not a lot of tenants who are willing to pay rents that will justify new buildings," she says.
Vulcan is known for ill-fated technology investments that fit into Mr. Allen's earlier vision of a "wired world." The firm lost enormous sums on investments in companies like Charter Communications Inc. But the firm also has invested large sums in real estate and a range of other asset classes.
Vulcan faces competition in its real-estate strategy because numerous other deep-pocketed investors have been chasing distressed real estate, while owners have resisted selling at today's discounted prices.
"We've taken a run at a couple other assets," Ms. Healey says. "There's a tremendous amount of capital in the market."Mr. Allen, 57 years old, authorized the Tempe acquisition and took part in the decision to move into new markets such as Phoenix that Vulcan believes are poised for a rebound, Ms. Healey says. The Tempe Gateway building was built by Opus Corp.'s Opus West unit, which filed for bankruptcy protection last year. The sale was part of the bankruptcy process.
The 260,000-square-foot building is on a main artery of Tempe near a light rail stop and close to Arizona State University. The building squares with Vulcan's interest in urban infill locations close to public transportation, Ms. Healey says.
Vulcan, founded in 1986, is headed up by Mr. Allen's sister Jody Allen. Firm officials say Vulcan's real-estate portfolio is more than 95% leased and comprises more than $2 billion in assets in the Seattle area, where Mr. Allen is one of the city's largest property owners. Vulcan owns nearly 60 acres of land in the city's South Lake Union neighborhood. That also is where Vulcan scored one of its more recent real-estate wins: a deal to build a new headquarters complex for online retailer Amazon.com.
Vulcan has also made some missteps. In the 1990s, Vulcan built and helped finance the Rose Garden arena in Portland, Ore., home to Mr. Allen's Portland Trail Blazers NBA basketball team. In 2004, the Vulcan affiliate that owned the arena filed for bankruptcy protection, and the Rose Garden was taken back by lenders, though Vulcan repurchased the arena in 2007. "There just weren't a lot of very wealthy people willing to buy skyboxes," says Randall Pozdena, managing director of ECONorthwest, an economic consultancy based in Eugene, Ore. A spokeswoman for Vulcan says the company treats the asset as a basketball asset, not real estate.
Betting on a Phoenix real-estate recovery is still something of a gamble. Tempe, part of the Phoenix metropolitan area and home to the corporate headquarters of U.S. Airways Group, has seen the vacancy rate of its Class-A office space soar to about 40% in the first quarter, including sublease space, from about 29% one year earlier, as the market has struggled to absorb newly constructed buildings, according to Cassidy Turley BRE Commercial, a real-estate-services firm in Phoenix.
Meanwhile, the average price paid for office space per square foot in Tempe fell to about $102 last year, from a peak of $265 in 2008, according to CoStar Group Inc., a real-estate-research firm. But Jim Fijan, an executive vice president with CB Richard Ellis who represented the group of lenders selling the Tempe building, said as many as eight local and national companies bid on the property. He estimates the building, acquired for about $135 a square foot, would cost about $225 a square foot to construct.
DEAL OF THE WEEK: New Logic in Vulcan Shift - WSJ.com
Thursday, June 17, 2010
• Read the full economic report
After a recession, the nation's Mountain West usually makes employment gains faster than the rest of the nation, analysts say.
That's not the case this time.
According to a new report, the region's slow economic recovery actually has weakened in some ways in the early months of 2010.
Metro Phoenix, along with Las Vegas and Boise, Idaho, remain behind the nation in the economic recovery, according to a June study produced by Brookings Mountain West.
Brookings' Mountain Monitor report identifies a number of indicators of economic success and compares data for the region's major metropolitan areas, as well as the average of the top 100 metropolitans in the United States.
While Ogden, Utah, Albuquerque and Colorado Springs appear to be back on their feet, for example, the Valley's real-estate-based economy is struggling to rebound.
"What is more troubling for the West is this is the first major recession in which areas like Phoenix did not power out of the economic trouble quicker than the rest of the country," said Mark Muro, fellow and policy director of the Metropolitan Policy Program at Brookings Institution.
Brookings Mountain West is a partnership between the Washington, D.C.-based Brookings Institution and the University of Nevada-Las Vegas. The Mountain Mirror report covers Arizona, New Mexico, Nevada, Colorado, Utah and Idaho.
In employment, economic growth and housing, both the region and Arizona lag, according to the study, which incorporates economic reports through March. Phoenix and Boise are among the hardest-hit metro areas in the nation for job loss, with employers slow to resume hiring. Home prices declined in every metro area in the region, and the number of lender-owned properties remains on the rise.
At first glance, the metro Phoenix data looks strong, with its total economic output ranking above the national average for the first quarter of the year. Its GMP, or gross metropolitan product, was up 1.2 percent from the fourth quarter of 2009. However, Phoenix ranks near the bottom nationally in overall loss of economic output since its GMP peaked in the fourth quarter of 2007.
But a major problem, the metro area's inability to create new jobs, remains. Since its employment numbers peaked in the third quarter of 2007, metro Phoenix has lost 11.9 percent of its jobs, ranking eighth-worst out 100 metro areas nationally.
"Jobs are the big struggle nationally and in Arizona," said Dennis Hoffman, economics professor and director of the L. William Seidman Research Institute at Arizona State University. "The real challenge with job creation stems from the fact that businesses have learned to get by with fewer people."
Many of the reasons for the slow recovery have been well-documented. With an economy based largely on growth and real estate, the Valley was left with little else when the housing bubble burst, followed by the financial meltdown. Real-estate and construction jobs disappeared, followed by jobs at businesses that fed off the industry.
"You had this really traumatic real-estate explosion, and the collateral damage of people's homes being underwater really hurt their ability to spend," Muro said.
Until the housing market rebounds, Hoffman said Phoenix won't see the job growth that it had enjoyed in years past. That rebound, he said, could be three to five years away.
Even though growth may be lagging, some Phoenix residents say they sense a noticeable improvement over the past six months. People and businesses are growing a bit more confident when it comes to spending, even if it's happening slowly, they said.
"It's getting better. I can tell by the amount of work I've been doing," said Lou Gandron, a heating, ventilation and air-conditioning technician for Southwest Trane. "I think we are walking out of it. We fell into it, and we are going to have to walk out."
"It is coming along very slow," said Kay Gordon, a Phoenix businesswoman. She said her employer had three weeklong furloughs over the past two years and had laid off 30 people, 15 in March.
Others have doubts.
"The recovery people talk about is in their dreams," said Jeffery Robinson of Phoenix. "People aren't out there buying. More and more businesses are folding."
Other states and regions, such as Colorado and Texas and much of the Midwest, have rebounded more quickly than metro Phoenix for a variety of reasons. Colorado was able to survive on a high percentage of employment coming from the government, positions that typically do not vanish during a recession. Texas' economy is much more diversified, with well-developed clean-energy and information-technology industries. The Midwest, with its farming and manufacturing focus, also has a heavy presence in the export market, another area of stabilization during the recession.
Muro also suggested that Arizona's relatively lower level of education is slowing its recovery. Colorado, with a better-educated workforce, was able to rebound more quickly as its laid-off employees were more successful at adapting.
How can Arizona reverse the trend?
The housing market continues to be relatively depressed, and the number of foreclosure properties in the Valley increased more than six times the national average during the first quarter.
Muro said that the way out is "clearly not back in to the real-estate-driven, speculative model."
He believes the Phoenix area needs to move forward to a different kind of economy. The more diversity it has, the more durability an economy will have in an economic downturn, he said.
"It (Phoenix) needs to . . . invest in education, innovation and really work to build export markets," Muro said. "The developing countries of Asia are growing. Where domestic consumption is muted, you need to go where the growth is going to come from."
Hoffman said economic-development officials also are attempting to attract and grow new companies. But, he said, so is every other metro area. The competition is tough, and it is made tougher by the lack of confidence outsiders have in the Phoenix economy. "We can engage in it, but it's just hard to predict that you are going to have massive job creation from new technologies and getting businesses here in the short term," Hoffman said.
He advocates taking a strategic, long-term approach, investing in what will be needed five to 20 years from now.
For example, he suggests leveraging the money the state has received from the federal government and building new infrastructure, including roads, water-delivery systems and renewable energy. That could put people to work today and reduce unemployment, while "putting an infrastructure in place that would be growth-enhancing in the future," he said.
Of course, the regional economy also relies on the national and global economy headed in the right direction.
Muro, citing the slow-to-grow employment figures and economic problems in Europe, fears the possibility of a double-dip recession.
Hoffman was slightly more optimistic. "There is a little sign of life. We have to put together a few more months of pretty good numbers and then we might be able to turn the corner."
Report: Phoenix lags other big cities in economic recovery
WASHINGTON - The Senate on Wednesday approved a plan to give homebuyers an extra three months to finish qualifying for federal tax incentives that boosted home sales this spring.
The move by Senate Majority Leader Harry Reid would give buyers until Sept. 30 to complete their purchases and qualify for tax credits of up to $8,000. Under the current terms, buyers had until April 30 to get a signed sales contract and until June 30 to complete the sale.
The proposal, approved by a 60-37 vote, would only allow people who already have signed contracts to finish at the later date. About 180,000 homebuyers who already signed purchase agreements would otherwise miss the deadline.
Reid, D-Nev., added the proposal to a bill extending jobless benefits through the end of November. Nevada has the nation's highest foreclosure rate, and Reid is facing a tough re-election campaign.
First-time buyers were eligible for a tax credit of up to $8,000. Current owners who bought and moved into another home could qualify for a credit of up to $6,500.
The $140 million cost of the measure would be financed by denying businesses the ability to deduct from their taxes punitive damages paid when losing lawsuits or judgments.
Senate OKs extension of home credit
WASHINGTON - Homebuilders are sending a message: They won't be able to contribute much to the economic recovery now that government homebuying incentives have vanished.
Home construction and applications for building permits sank in May, overshadowing favorable reports on manufacturing and wholesale inflation.
Fewer homes means fewer jobs. Construction fuels a broad swath of industries across the economy. Yet double-digit unemployment is among the main reasons people have passed on buying new homes. Even with nearly record-low mortgage rates, the industry is struggling.
"The economy is growing, and the housing market is still in recession," said Eugenio Aleman, senior economist with Wells Fargo Securities. "It's not going to contribute to growth, but it is not going to pull the economy back down."
Overall, new home and apartment construction fell 10 percent in May to a seasonally adjusted annual rate of 593,000, the Commerce Department said Wednesday. April's figure was revised downward to 659,000.
Applications for new building permits, a sign of future activity, sank 5.9 percent, to an annual rate of 574,000. That was the lowest level in a year.
Builders are scaling back now that tax credits of up to $8,000 have expired. The biggest evidence of that trend: The number of new single-family homes tumbled 17 percent, the largest monthly drop since January 1991.
Steve Romeyn, managing partner of Windsong Properties in the Atlanta area, said the tax credits helped buyers sell their homes and move to his company's retirement communities.
Now that the tax credits are gone, "I think we're going to slip back and not be able to maintain the pace of the first half of the year," he said.
But some builders see opportunity in the down market. Andrew Zuckerman, CEO of Zuckerman Homes in Coconut Creek, Fla., said his company is purchasing land and plans to develop it as early as winter.
"We think now is a good time to buy," Zuckerman said. "We think the market is slowly stabilizing."
The poor report on housing came despite more promising reports on the economy. Inflation at the wholesale level remains tame, and industrial production rose for the third straight month.
Output at the nation's factories, mines and utilities climbed 1.2 percent in May, the Federal Reserve said Wednesday. Factory production rose 0.9 percent. Utility production jumped 4.8 percent because of warm weather that prompted people to crank up their air-conditioners. Mining was the only component that lagged.
Wholesale prices actually fell for a second straight month in May. But the 0.3 percent dip was pulled down by a 7 percent drop in gasoline prices and a 7.4 percent fall in home heating-oil prices. Core inflation, which excludes energy and food, rose 0.2 percent in May. It is up just 1.3 percent over the past 12 months.
Falling energy costs are expected to keep inflation low in June. Gasoline costs are down significantly from a month ago. The nationwide average for regular gasoline is $2.70 currently, down from $2.87 a month ago, according to AAA's "Daily Fuel Gauge Report."
Food costs dropped 0.6 percent, the biggest decline since July. The decreases were led by an 18 percent drop in the cost of fresh vegetables. But vegetable prices had been driven higher because of freezes earlier in the year in Florida.
The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to provide support for the economic recovery.
Wall Street appeared to show little concern with the housing figures. The Dow Jones industrial average edged up nearly 19 points in afternoon trading.
The rate of homebuilding is still up about 41 percent from the bottom in April 2009. But it's down 70 percent from the decade's peak in January 2006.
Builders now unable to aid recovery
Commercial-property owners are counting on apartment buildings to lead the Phoenix area's real-estate market toward recovery, based on a recent rebound for units rented and buildings sold.
That means renters are less likely to see future discounts and giveaways as aggressive as those they have received in recent years, although the mild recovery has not translated into higher rent prices thus far.
An immediate recovery for rental housing is by no means assured, but after two years of dismal sales and high vacancy rates, the double shot of good news has left some local real-estate professionals with a sense of hope.
"We are seeing a tremendous amount of buyer interest for multifamily assets in the Phoenix area," said Bret Zinn, vice president of multifamily investment services for commercial real-estate firm Transwestern in Phoenix. "There is a scarcity premium being paid today, as the availability of saleable assets does not meet the demand of the deepening pool of investors."
Zinn, a 15-year veteran of the apartment-sales business whom Transwestern hired in late January in anticipation of a market upturn, said significant losses in the value of apartment communities over the past two years are responsible for the shortage of buildings for sale.
As with all commercial real estate, many apartment owners are "upside down" on their commercial real-estate loans, meaning that they owe more on the loan than the property is currently worth, he said.
Zinn said most commercial real-estate lenders have been reluctant to accept the financial losses they would incur from approving short sales on the properties.
"Owners of apartments that would like to sell and take advantage of the many well-capitalized buyers in the marketplace are not able to do so without getting their lenders to agree to take a loss," Zinn said.
Still, the return of buyer demand is a positive development that has yet to happen with most office, retail and industrial properties.
In the fourth quarter of 2008, only three apartment buildings changed hands. A year later, that number had increased to 13 sales, and it has gone up every quarter since then.
In the first quarter of this year, 18 apartment buildings were sold, compared with 13 in the first quarter of 2009. In the second quarter this year, 19 more were sold.
Nationally, the rental-housing market took a positive turn in the fourth quarter of 2009 and posted even bigger gains in the first quarter of this year, with the value of apartment properties increasing by 3.3 percent.
The same cannot be said for apartments in the Phoenix area, where the average sale price per square foot decreased by 20 percent from the first quarter to the second quarter, going from $43.91 to $34.83.
But other indicators have turned positive this year, including a huge jump in net move-ins, from 531 units in the fourth quarter to 4,179 in the first quarter. Total move-ins during the first quarter of 2009 was 1,121 units.
Apartment-building and other commercial real-estate owners across the U.S. have struggled to survive since the overbuilt real-estate market began to collapse in late 2007.
Job losses, a mass exodus of Hispanic residents and ever-growing competition from investors in foreclosed single-family homes have contributed to a precipitous drop in apartments' value and an explosion in vacancies, experts said.
Apartment buildings usually lead the commercial real-estate market during both upswings and downturns, because the tenants' leases, from six to 12 months, are shorter than with other commercial-property types.
A number of real-estate-related businesses that haven't traditionally gotten involved in the rental market are doing so now, hoping to ride what passes for a positive wave.
One of those businesses is Internet home-listings site Trulia.com, which in November added rental-property listings to its online portfolio.
Trulia.com spokesman Kent Schumann said Web traffic to apartment-finding sites such as Rent.com and Apartments.com doubled during the past year.
"Seven of the top 20 real-estate (web)sites now are for rentals, whereas a year ago there were only three," Schumann said.
Those numbers don't necessarily add up to higher revenue for apartment owners, said Jon Pastor, founder and CEO of RentJungle.com, a Google-inspired apartment-finding service that Pastor launched in September.
The recent surge in available single-family homes for rent has kept many apartment owners from seeing the increased demand for rentals translate into lower vacancies and higher rents, although the Valley did see a very slight rent increase of 0.5 percent in the first quarter, he said.
Pastor said his reason for entering the rental-property market as a technology entrepreneur was a belief that the industry's listing and search technology was in dire need of an overhaul.
He said the two biggest factors affecting apartment vacancies are population change and consumer confidence.
Because Arizona's growth has slowed significantly, a significant drop in vacancy would require a boost in confidence, such as recent college grads moving out of their parents' homes and roommates deciding they can afford their own places.
One group that generally has not helped fill apartment communities is the recently foreclosed upon, Pastor added.
Most former homeowners are opting to rent single-family homes and not apartments, he said.
Still, a number of real-estate experts said they have noticed a positive change in most consumers' attitudes toward renting in general.
"I would think that adage that it's always good to buy a house has kind of gone out the window," Pastor said.
Phoenix rental market showing signs of rebound
An index of Phoenix-area home prices rose for the second consecutive month in May, the latest sign that home prices are stabilizing.
The Arizona State University-Repeat Sales Index rose 2.7 percent from a year earlier. That reverses a decline of the same magnitude in March. The index posted its first gain in about three years in April, rising 1 percent. Both April and May figures are preliminary and subject to revision.
ASU real-estate professor Karl Guntermann expects the year-over-year price gains to continue through the summer but not much beyond that because the economy is still weak.
"Unless there's a dramatic change in the market in terms of the local economy improving or foreclosures suddenly slowing down dramatically - neither of which seem likely - it's most likely that house prices will more or less flatten out for the rest of the year," he said.
On the foreclosure front, the average price on foreclosure homes went up 3 percent in May from a year earlier, not as strong as the 5.3 percent increase in April. March was the first month foreclosure prices increased year over year since the downturn began.
"It's probably saying the same thing: Prices are going to go up, but then they'll just fluctuate," Guntermann said.
Sales of foreclosure homes are dominating the market and price trends. Prices of non-foreclosure homes, as measured by the index, are still posting double-digit declines.
Home-price index for Valley climbs 2nd month in row
WASHINGTON - The Federal Reserve adopted new rules Tuesday aimed at protecting credit-card customers from getting socked by lofty late-payment charges and other penalty fees.
The rules respond to public and congressional outrage over practices by credit-card companies.
They bar credit-card companies from charging a penalty fee of more than $25 for paying a bill late. They prohibit credit-card companies from charging penalty fees that are higher than the dollar amount associated with the customer's violation. They also ban so-called "inactivity" fees when customers don't use the account to make new purchases, and they prevent multiple penalty fees on a single late payment.
The rules take effect on Aug. 22.
"Consumers will finally be protected from the worst credit-card-issuer abuses," said Rep. Carolyn Maloney, D-N.Y., a major advocate for the changes.
In addition, the rules require companies to reconsider interest rates imposed on customers since the start of last year. Some lenders pushed through rate increases ahead of the first phase of sweeping new credit-card protections, which took effect earlier this year. Those first set of rules were designed to protect customers from sudden hikes in interest rates.
"The new rules require that late-payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers," said Fed Gov. Elizabeth Duke, the central bank's point person on the rules.
The American Bankers Association said the industry intends to "work quickly and diligently" to implement the new provisions.
Legislation in Congress revamping the nation's financial-regulatory structure could reduce the Fed's influence over consumer protections. A Senate-passed bill would house a watchdog agency inside the Fed, but Chairman Ben Bernanke would have no authority over it. A House-passed bill would set up a new agency devoted to consumer protection and would strip the Fed of some of its consumer oversight.
Fed OKs card-user safeguards
WASHINGTON - Homebuilders are feeling less confident in the recovery now that government incentives for buyers have expired.
Their pessimism could drag on the economy, which may not benefit so much from the job creation that construction generates throughout various sectors.
The National Association of Home Builders said Tuesday that its housing-market index fell to 17 in June, sinking five points after two straight months of increases. It was the lowest level since March.
Builders had been more optimistic earlier in the year, when buyers could take advantage of tax credits of up to $8,000. Those incentives expired on April 30, although buyers with signed contracts have until June 30 to complete their purchases.
Experts predict home sales will slow in the second half of 2010. In addition, high unemployment and tight mortgage lending continue to keep many buyers on the sidelines.
The drop in activity is "a wake-up call to the fact that the market will struggle to stand on its own two feet without the tax credit," wrote Paul Dales, an economist with Capital Economics. "The double-dip in both activity and prices that we have been expecting for some time appears to have begun."
New-homes sales made up about 7 percent of the housing market last year. That's down from about 15 percent before the bust.
It's also bad news for the economy. Each new home built creates the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders. The impact is felt across multiple industries, from makers of faucets and dishwashers to lumber yards.
But it has weakened in recent years. Spending on residential construction and remodeling made up only about 2.4 percent of the nation's economic activity in the first quarter of the year. That's down from a peak of more than 6 percent during the housing market's boom years.
In a typical economic recovery, the construction sector provides much of the fuel. But developers are trying to sell a tremendous glut of homes built during the boom years and they are competing against foreclosed homes selling at deep discounts.
Another problem for the building industry is that lenders are reluctant to make construction loans to developers.
Homebuilders doubt recovery
Two years ago, Arizona's largest private real-estate lender, Mortgages Ltd., was forced into bankruptcy. Its high-profile and expensive projects stalled shortly after that, as did the lender's dividends to investors.
ML Holdings, successor to Mortgages Ltd., is now taking offers on one of the biggest developments in its portfolio, the Centerpoint Condominiums in downtown Tempe.
Proceeds from the sale will go to pay back the development's many investors.
At least 75 large real-estate firms have expressed serious interest in the two towers, said Mark Winkleman, chief operating officer for ML Holdings.
Those companies have signed confidentiality agreements and provided ML with information on how they would finance the deal. More than 300 firms initially asked for information on the condo high-rises.
Tyler Anderson and Sean Cunningham of CB Richard Ellis are marketing the condo project, which ML Holdings foreclosed on a few months ago.
The 22-story tower is nearly complete, while much more work is needed on the project's 30-story tower. The towers are being sold "as is."
Other Mortgages Ltd. real estate that ML Holdings is now trying to sell:
• About 1,680 acres in Pinal County.
• Two central Phoenix townhouse sites with some partially built houses at 121 W. Maryland Ave. and 802 E. Missouri Ave.
• Also in Phoenix, partially built commercial buildings and some vacant land along Van Buren and 48th streets, a 42-unit apartment complex at 4540 E. Belleview St., and 5 acres of vacant land at McKinley and 44th streets.
• About 510 acres of vacant land in Eloy.
In March, ML Holdings sold the 21 brick mansions in central Phoenix called Chateaux on Central for $7 million.
The homes, nearly complete, with elevators and wine cellars, were marketed in 2007 for more than $2 million a piece.
Mesa is trying to sell 11,000 acres it owns in Pinal County to fund a new training field for the Chicago Cubs.
The city has hired Scottsdale-based land brokerage Nathan & Associates to sell the site, southeast of Coolidge along Arizona 87.
Mesa bought the Pinal land for $30 million in 1985.
Lender fields bids for Centerpoint condo towers
Tuesday, June 15, 2010
The impact of Arizona's tough new immigration law is rippling through the state, six weeks before the law is scheduled to go into effect.
One area where SB 1070 could hurt Arizona, but take many months to manifest, is metropolitan Phoenix's housing market.
An exodus of people - both legal and illegal residents - could be one more drag on a housing-market recovery. Departures from a state where growth is the economic foundation could add to the number of foreclosures and vacant houses and apartments, all of which will hurt the housing industry just as signs of recovery are starting to appear.
Driving illegal immigrants out of Arizona is one stated purpose of the new immigration law. But the law, experts say, could also drive out legal residents and deter potential new residents - people who are afraid of what might happen to them or who simply object to the law.
Real-estate analysts and economists are watching for signs that both illegal and legal residents are moving from the state, while also tracking the number of newcomers to Arizona. After the immigration law goes into effect July 29, it may become one more factor in real-estate forecasts for the region.
"Estimates are that there are several hundred thousand undocumented aliens residing in Arizona," said Phoenix housing analyst Mike Orr, publisher of the Cromford Report, a daily housing-research report. "If the law has the intended effect and these people do leave, then both population and demand for housing will probably decline."
There's a misconception among some Arizona residents that illegal immigrants don't own homes in the state. Housing advocates say thousands if not tens of thousands of people who are not legal residents have purchased houses here.
Before the real-estate crash, it was much easier for everyone, including illegal immigrants, to obtain mortgages to buy Phoenix-area homes.
In some cases, lenders eager to make loans did not check for documentation. In others, there may have been fake documentation.
"Many people in real estate operated with a 'don't ask, don't tell' policy when it came to certain homebuyers and borrowers. We didn't feel like it was our job to be an enforcement agency," said Margie O'Campo de Castillo, a Phoenix real-estate agent. "I always tell people if they aren't legally here, it may not be in their best interest to buy a home. But it's not my decision."
She is trying to help a friend who owns a small business and who had a Phoenix home but is not a legal U.S. resident.
"He never missed a payment, but his business has slowed down," O'Campo said. "He found a buyer to do a short sale on his home, but his lender wouldn't work with him because he isn't here legally. He lost his house to foreclosure."
Since the state's employer-sanctions law passed in 2007, O'Campo said she's seen many undocumented homeowners lose homes to foreclosure, either because their lenders won't work with them or because they can't sell and want to leave the state. The 2007 law makes it illegal to knowingly hire undocumented workers in the state.
Housing experts believe the employer-sanctions law did have a negative effect on the housing market, though by how much is difficult to say because of the overall recession.
A report from the Department of Homeland Security found that more than 100,000 illegal immigrants left Arizona in 2008, more than any other state. Metro Phoenix foreclosures and apartment vacancies both jumped that year.
Signs of SB 1070 putting more pressure on the housing market would emerge in several places.
The most obvious and immediate sign would likely be more empty homes and apartments in areas of metro Phoenix heavily populated by Hispanics.
Housing experts say the employer-sanctions law had a negative effect in south and west Phoenix, Maryvale and Avondale. Those areas still have some of the highest foreclosure rates in the region.
During the past few months, the overall number of foreclosures in the Phoenix area has dropped. So any significant increases in foreclosures within communities with high Hispanic populations could be attributed to SB 1070.
Another place where signs of damage to the housing market might appear, housing analysts say, is in foreclosure filings. Large numbers of homes falling into foreclosure, with owners who have Hispanic last names, could also be a sign SB 1070 has pushed more homeowners out of the state. Within days of Gov. Jan Brewer signing SB 1070 into law on April 23, owners of small apartment complexes in parts of metro Phoenix that were home to large Hispanic populations started seeing tenants move out. The same thing happened after the employer-sanctions law.
Metro Phoenix apartment vacancies dropped last month. An increase in specific neighborhoods could be attributed to the new law.
"The immigration law creates a difficult situation for both legal and illegal residents," said Jay Butler, director of realty studies at Arizona State University. "Some illegal residents may have planned on leaving the Valley anyway because they can't find jobs. But I have talked to young Hispanics who are residents and so are their parents and grandparents. And those Hispanics plan on moving to other states because they don't want to be perceived as second-class citizens."
The immigration law's impact on homebuyers is the biggest unknown.
Butler said it is hard to project how the law will impact the decisions of people from out of state who had planned to move to Arizona or buy investment, second or retirement homes here.
A loss of Hispanic homeowners and renters could be offset if more people who support the immigration law, or don't care about it, move to the Phoenix area and buy and fill the empty homes.
Despite the many boycotts of Arizona by major cities and organizations because of the immigration law, some recent polls show residents of other states, including Nevada, would back similar legislation.
Arizona housing analyst RL Brown said the main issue for some homebuyers is to feel safe, and the immigration law appeals to some of those people.
"I talk to a lot of potential homebuyers from around the country. So far, no one is really foaming at the mouth about Arizona's immigration law," he said. "But we'll see. If home sales fall off the cliff, then we have to look at the law as a factor."
Some market watchers see the immigration law as one more problem that Phoenix's economy and housing market don't need now.
"The immigration law just piles onto our problems," said Brett Barry, a Phoenix real-estate agent with HomeSmart. "We are already struggling to find the jobs and keep the schools open to entice new residents."
Orr, the housing analyst, said people from outside Arizona considering buying a vacation or investment home here may change their minds, not to boycott the state but out of concern the law will negatively impact the housing market and home values.
Out-of-state buyers can be tracked through property records. A significant drop or increase in homebuyers from outside Arizona during the next few months would be another indicator of how people are reacting to the state's immigration law and how it's going to impact the housing market.
Arizona immigration law may increase Phoenix foreclosures
Elevation Chandler, the partly built hotel with a mortgage of $24 million, could realistically be sold for $5 million to $6 million, a top commercial broker says.
Moreover, a buyer would need to tear it down because a market no longer exists for another big hotel, and the steel shell has probably deteriorated so much that it's no longer sturdy and safe.
Brent Moser, executive vice president of Cassidy Turley BRE Commercial, said the 10.6-acre property at Price and Frye roads is worth whatever the land is worth, and that depends on its intended use.
When construction began in 2005, a hotel may have been a good use, he said. "But quite a bit of hotel product has been built in the last years in that submarket, and it will be a couple of years before that use makes sense again," Moser said.
Another possible use would be Class A office space, which Chandler officials had pondered. But office space is overbuilt.
The best use of the property would be made by a retail tenant that wants to be close to Chandler Fashion Center, Moser said.
The market now for a retail user could be $10 a square foot, making the site worth $5 million to $6 million, he said.
Moser has talked with contractors, and the consensus is the buyer would need to demolish the abandoned existing structure. Steel, concrete and plumbing can't be exposed long to the weather.
"There are questions out there as to whether that structure can be utilized," he said. "My guess is they'd have to start over."
He put demolition costs at $400,000.
Moser suggested a logical retail tenant would be high profile, such as an Ikea or other furniture store; higher-fashion users such as boutiques; or a big-box store.
A big box of 150,000 square feet would need a larger parcel, because the conventional formula is having a building cover about 25 percent of land. So the buyer would need to pick up some land to the south, although that would take work to get the extra land rezoned from office to retail.
"I've got to think Chandler is going to be pretty cooperative, given the fact that eyesore has been there going on three or four years now," Moser said.
"That's not to say the retail world is going gangbusters right now, but there are tenants still lurking around the city looking for new locations," Moser said.
Plus the Chandler Fashion Center is so successful, it would be a big draw to a new neighbor.
Whatever goes on the spot, it won't be soon.
"It's such a legal nightmare that I would speculate it's at least another 18 to 24 months before all of the lawsuits . . . and whatever mess that's out there gets flushed out of the system so the property can be sold and developed."
The rehabilitation process would be expedited if Chandler dedicated some redevelopment funds, he said.
"It could be argued that this is a blighted property, although it sits in proximity to one of the most successful retail projects we've seen in 20 years in Phoenix," Moser said.
"It may take some cooperation like that to pry it away if it winds up in Point Center's (Point Center Financial, the mortgage holder) hands."
It would take another six or seven years to justify luxury condominiums and a hotel of the magnitude that developer Jeff Cline had in mind, Moser said.
The dream for that site wasn't bad, Moser said.
"It was a great location and a great project that may have overshot the condo portion a little."
Bruce D'Agostino, executive director of the Washington, D.C.-based Construction Management Association of America, doubts a buyer would build on the skeleton.
"That structure would have to come down," he said. "Nobody is going to assume the liability on that."
Broker: Hotel would need to be torn down
The Phoenix architectural company Aecom, formerly DMJM H+N, is owed $851,472 by developer Jeff Cline for architectural work on Elevation Chandler.
That is the largest unsecured claim in the list of creditors Cline filed with U.S. Bankruptcy Court when he sought Chapter 11 protection in April 2008.
Judge Sarah Curley dismissed the case last week.
The case's dismissal allows creditors to sue Cline.
When he filed, Cline said the creditor with the second-largest claim was another architectural firm, Gould Evans of Phoenix. He said he owed it $606,717, but Gould Evans claimed $704,270.
Other claims listed by Cline when he filed for bankruptcy protection included Spark Design of Tempe, an ad agency that created the name Elevation Chandler and its website, $125,000. Spark Design countered that it was owed a higher amount: $310,713. In total, Cline claimed $59.9 million in liabilities to creditors holding secured claims, including investors, and $1.7 million to creditors with unsecured, non-priority claims.
Elevation's creditors now can sue
Mark Henle/The Arizona Republic Luis Bojorquez frames a Meritage Home under construction in the Gilbert community Lyon's Gate.Homebuilders are buying land again in metropolitan Phoenix.
So far this year, according to the Arizona brokerage firm Land Advisors, homebuilders here have spent $90 million on land purchases for new homes. That's the most builders have invested in the region's land in any year since the peak of the housing boom in 2006.
New land purchases are a sign the cycle is stirring to life again in a retooled housing industry.
The parcels of land and the pool of builders buying them are both much smaller than before the real- estate crash. But residential lot prices are climbing as a steady stream of purchases by builders the past six months restarts the region's new-home industry.
Home building had a predictable pattern in the Phoenix area prior to the 2007 housing-market crash. Builders bought lots in the newest edge communities, built and sold homes and then bought more lots. Big builders bought land years ahead of construction.
The crash disrupted that pattern and left builders with unsold homes and vacant lots. Houses and lots were sold off at sale prices. Some builders lost large parcels of land to foreclosure. Other builders slid into bankruptcy or simply closed. Home building slowed to levels not seen since the 1970s.
Builders who survived the crash have cut operating and building costs and are trying to eke out smaller profits on fewer home sales. Many of the big builders have cash to spend on land again but are buying only what they can sell homes on quickly.
Federal aid from a new tax break and a shift by homebuyers away from foreclosures are also driving the recent land purchases.
"Builders are buying Phoenix-area land now because they expect to make money on it in the near future," said Arizona home-building analyst RL Brown. "Builders are more optimistic about the housing market now, but the smart ones are still being very cautious."
The $90 million in recent land purchases by builders reveals new trends and different hot spots for the new-home market stirring back to life in Phoenix.
Homebuilders are more selective now, buying fewer lots and in specific target areas. Sites closer to Phoenix's core and near freeways are drawing the highest prices. Builders want lots prepped and ready for new homes for faster, less-expensive turnaround in the buy-build-sell cycle.
"Most builders now will buy 50 to 100 lots in a development, instead of the 200 lots they would have purchased before the boom," said Nate Nathan, president of Scottsdale-based land brokerage firm Nathan & Associates. "Builders have adapted to the new market reality in Phoenix. The profit margins are tight."
Mesa, Chandler and Gilbert, land brokers say, are now the hot spots for homebuilders. Lot prices in those southeast Valley communities have almost tripled in the past two years. Home sites are selling for more than $80,000 in parts of Chandler, prices similar to what builders paid in the pre-boom years of 2003-04.
More than 50 percent of metro Phoenix's new-home sales during April were in Mesa, Chandler and Gilbert.
Developments along the Interstate 17 corridor north to Anthem and in Avondale and Goodyear in the West Valley are also popular with builders. Land prices in these areas are climbing as well, but lots are still typically selling for below $40,000.
Parcels in metro Phoenix's most far-flung communities including Buckeye west of the White Tank Mountains and the Pinal County communities of Coolidge and Eloy aren't drawing a lot of builder attention now. The areas are too far out for most current buyers because their tastes have changed, no matter how inexpensive new homes are priced.
Despite recent increases in new-home construction and sales, the home-building industry is still dealing with the worst housing market in Phoenix history.
About a dozen of the region's builders have figured out ways to make money constructing less-expensive homes. These builders have cut costs on labor, materials and marketing. Builders no longer own the expensive land purchased during the boom. That land was sold for a loss or lost to foreclosure. Now, builders are repurchasing the same land for less than half what it sold for in 2004-06.
"Smart builders have cuts costs to the point where they can sell homes for less but still see a slight profit," Brown said. "Construction costs are half of what they were five years ago. Builders' office and marketing overhead is one-third of what is was then. Homes have been streamlined with fewer expensive amenities and extras."
Brown said to save money, the president of one of metro Phoenix's biggest homebuilders serves as salesperson at one of his subdivisions every Friday.
Most builders also are receiving some federal help. A change in the federal
He said there are subdivisions in metro Phoenix where 20 to 30 new homes are selling a month. Last year, builders were reporting fewer than five home sales a month in most of the area's subdivisions.
A recent shift in metro Phoenix home-buying tactics also is helping homebuilders.
More homebuyers have become frustrated with the bidding wars and delays in foreclosures and short sales. During the past few months, a growing number of people have opted to buy new homes or existing homes sold through a regular sale.
"We are competing with the resale market in the Valley," said Steve Hilton, chairman of Scottsdale-based Meritage Homes. "People will pay a small premium for a new home now in prime locations."
The median price of a metro Phoenix new home sold during April was $199,362, up from $188,000 a year earlier, according to the "Phoenix Housing Market Letter."
Many builders ramped up home construction in anticipation of the federal homebuyer tax credit. The deadline for the credit was April 30. Buyers have until June 30 to close on home purchases signed by the deadline. That means sales spurred by the federal tax credit could boost new-home sales until July.
Josh McNeil is shopping for a new home in Gilbert or Queen Creek. He didn't make the deadline for the federal tax credit but thinks he will find better deals on homes now.
"Prices have gone down some in a few places where I am looking," he said. "I think the builders built homes for buyers they thought would move faster for the tax credit."
New-home sales in metro Phoenix climbed slightly to 823 in April from 789 during the same month a year ago.
McNeil is planning to buy in the next six months and wants a new home because he has friends who have failed multiple times trying to buy foreclosures or short sales.
The increase in land purchases is one of several early signs of higher expectations for the new-home market.
Nationally, builder confidence is the highest it's been since August 2007, according to the monthly National Association of Home Builders/Wells Fargo Housing Market Index.
Through April, new-home permits in the Phoenix area were up 90 percent from last year.
But to keep that increase in perspective, 2009 was the slowest year for home building since the early 1970s. For the first four months of this year, 2,964 new-home permits have been issued in metro Phoenix, compared with 1,561 for the same period in 2009. May figures aren't yet available.
"I think Phoenix's housing market will gradually get better. But I am not looking for it to get dramatically better anytime soon," Hilton said. "Some builders are overpaying for land now because they are too optimistic."
Land prices have climbed faster in metro Phoenix than in almost any other part of the country, according to a report from the national housing-research firm Zelman & Associates. California's Inland Empire area has also seen big jumps in land prices
The forecast for metro Phoenix home building during the next few years is for small annual increases until at least 2012.
Housing analyst Brown expects 8,500 new homes to be built in metro Phoenix this year, up from 8,000 in 2009. But his forecast calls for 22,000 new permits in 2012.
Market watchers are waiting to see if new-home sales continue to climb later this summer, after the final deadline for the federal homebuyer tax credit. No one is expecting big monthly increases in metro Phoenix home building this year, but small gains could lay a foundation for the industry's recovery.
Arizona home builders buying up land once again
With all eyes now focused on the World Cup, one thing seems certain - the eventual winner will be Brazil, Argentina or one of the half-dozen European powerhouses.
Big clearly is best on the global soccer stage, as it has been in every tournament since little Uruguay won it all in 1950.
The same description doesn't necessarily extend to the business world and the stock market, where the top companies don't always fare so well.
The past few years have been horrible for several once-invincible corporations including General Motors, Toyota, Bank of America, Citigroup and now BP.
Are the setbacks sustained by these giants mere coincidences, or do bad things tend to happen to industry leaders?
In a warning that's worth heeding by investors, Robert Arnott, a money manager at Research Affiliates in Newport Beach, Calif., makes an interesting case for the latter.
"When you're No. 1, you have a bright target painted on your back," he wrote. "Indeed, in a world of fierce competition and serial witch hunts in Washington, that bull's-eye is probably painted on your front and sides, too."
Arrows get launched from competitors, politicians and pundits. The public favors underdogs and calls for your head.
"Hardly anyone outside of your own enterprise is cheering for you to rise from world-beating success to still-loftier success," Arnott wrote.
He cited other examples, including Goldman Sachs (now facing fraud charges), Exxon Mobil (regularly accused of making obscene profits), Microsoft (a target for monopolistic practices) and AT&T (broken up years ago for the same reason).
"The very business practices that propel an organization to No. 1 - aggressiveness, focus, canny outmaneuvering of the competition - become unacceptable if you're wearing the yellow jersey," Arnott wrote.
Many investors pad their portfolios with the shares of industry-leading companies and, in fact, often consider that the safe thing to do. Yet such behavior can be hazardous.
Arnott tracked the "top dogs" in 12 industry sectors over 58 years and noticed these firms tend to lag in the stock market.
"We find the leader in any sector underperforms the average stock in its own sector by 3.5 percent in the next year and the next year and the next year," he wrote. "The damage doesn't really slow down for at least a decade."
The top stocks in those 12 market sectors lost 28 percent in relative value, compounded, compared with the average stocks in their groups.
"For investors, top-dog status is dismayingly unattractive," Arnott wrote.
Some other findings from his research:
• Top dogs tend to get booted out by new leaders over time, with the notable exception of the energy field, where Exxon Mobil continues in the legacy of primacy once enjoyed by Standard Oil.
• Top dogs tend to fare better during Republican administrations, when politicians are less focused on regulation and less likely to demonize success.
• Investors should consider stripping their portfolios of industry leaders or at least paring back their exposure.
Many knowledgeable investors recognize that small- and mid-sized stocks, along with their heightened volatility, have delivered better long-term appreciation than big companies. However, the analysis hasn't tended to compare the very top dogs against everyone else.
Since 1926, large stocks in general have averaged a 10 percent annual growth rate compared with 11.9 percent yearly for small stocks, according to researcher Ibbotson Associates.
Traditional explanations for this performance gap include the fact smaller firms often are more nimble, more entrepreneurial and less bureaucratic than their larger rivals, and they can generate bigger percentage profit gains from each new dollar of revenue.
But Arnott's research suggests there's more to it than that, with big companies also needing to spend a lot of time, energy and money defending themselves in an increasingly hostile world.
Largest firms face obstacles
Reuters: Financial Services and Real Estate
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